'Kidnappers can't blackmail Germany'

Chancellor Angela Merkel vowed yesterday that her new government would not be blackmailed by kidnappers holding a German woman in Iraq and called terrorism a threat to the country's core values of freedom and tolerance.

In her first major speech to parliament since replacing Gerhard Schroeder as German leader last week, Ms Merkel touched on a wide range of issues, from the German economy and her reform plans to the European Union budget and alleged CIA prisons.

But she kicked off her address to the Bundestag, a tradition for new German chancellors, by focusing on the case of a German archaeologist who was seized with her driver in Iraq on Friday.

"This government, this parliament will not let itself be blackmailed," Ms Merkel said. "It (terrorism) is directed at everything that is important to us, at the core of our civilisation. It is directed against our entire value system."

Militants holding 43-year old Susanne Osthoff have said they will kill her unless Germany stops cooperating with the US-backed Iraqi government, according to a tape received by a German television station.

The kidnapping, the first of a German citizen in Iraq, has presented Ms Merkel with her first major test since becoming the country's first woman chancellor last Tuesday.

Ms Osthoff's capture and mounting questions in Germany about US handling of detainees could also test Ms Merkel's vow to improve relations with Washington, strained when Mr Schroeder clashed with President George W. Bush over the Iraq war.

In a one-and-a-half hour speech, Ms Merkel was forced to strike a delicate balance on both foreign and domestic issues.

Although her conservatives narrowly beat Mr Schroeder's Social Democrats (SPD) in an early election in September, they failed to win enough votes to form a government with their allies and were forced into a "grand coalition" with the SPD.

As chancellor, Ms Merkel faces the tough challenge of juggling competing views and interests within her new government while achieving what Mr Schroeder failed to do in his seven years in office - cut unemployment and spark a return to robust growth.

The 51-year old pastor's daughter who grew up in the communist east and began her political career after the fall of the Berlin Wall in 1989, offered a sober view of the economy, which has among the weakest growth rates in the 25-nation EU and is struggling with a jobless rate of over 11 per cent.